Malls Get Facelift to Pull In Shoppers

Simon Property's Roosevelt Field mall in Long Island will be renovated.
Bloomberg News

By

Kris Hudson

Dec. 18, 2012 9:31 p.m. ET

The sprawling Roosevelt Field mall on Long Island, anchored by Bloomingdale's, NordstromJWN-0.04% and Macy's, ranks among the 20 most-lucrative malls in the U.S.

But Roosevelt Field's owner, Simon Property Group Inc.,SPG0.58% still intends to spend roughly $300 million in the next two years to improve the shopping center. The overhaul will add a Neiman Marcus Group luxury department store, expand the mall's dining choices and upgrade its movie theater with lounge seating and full menus.

After decades of retail construction, the era of new-mall development in the U.S. is drawing to a close. Much of the country is overbuilt, and online shopping has crimped many retailers' store-opening plans. In an attempt to keep shoppers coming—and to squeeze more revenue out of established locations—mall owners and retailers are shifting to renovations.

"There are very few markets that aren't already served by sophisticated retail," said Rick Sokolov, president of Simon, the country's largest mall owner. "Making what you already have as good as it can be is the best way to go."

If overhauls are done right, their returns can be higher than from new developments. Landlords and analysts say the improvements can generate annual income of as much as 10% to 12% of the cost of the upgrades. By comparison, new development typically yields returns in the high single digit range.

For example, Taubman Centers Inc.TCO5.95%'s 2007 redevelopment of its Twelve Oaks Mall in Novi, Mich., which added a wing anchored by Nordstrom, yielded a 10% return on the project's $63 million cost, according to Taubman.

Small luxury retailers of jewelry, accessories or fashion, such as LVMH Moet Hennessy Louis Vuitton, Tiffany or Michael Kors, as well as highs-ales stores such as Apple

A given metropolitan area that has no more than three or four high performing malls, sometimes only one

Location in an affluent suburb or a major downtown, such as Chicago's Water Tower Place mall

Built within the past 10 years or renovated and expanded in that time frame

Big public spaces, such as children's play areas or center courts for live entertainment

Source: Green Street Advisors and Envirosell Inc.

As they renovate, mall owners are incorporating the lessons they are learning about how to succeed amid the explosion of online shopping. For all the hand-wringing among store owners about sales lost to the Internet, many are figuring out ways to exploit the natural advantages that stores have over computers.

Mall owners are adding more restaurants, upscale movie theaters, supermarkets and other tenants that offer goods and experiences that can't be found online. In their renovations, some malls also are reconfiguring more stores to have direct access to parking lots, so shoppers can dash in and out for quick service rather than having to traverse the entire shopping center.

General Growth Properties Inc.,GGP0.89% the second-largest mall owner, has earmarked $1.5 billion for redevelopment projects, including 17 that it started this year and another eight to begin in 2013. In one of its largest projects, the company is planning to raze a Sears Holdings Corp.SHLD1.22% store at its flagship Ala Moana Center mall in Honolulu and replace it with small shops that collectively would pay more in rent than single department stores.

Meanwhile, CBL & Associates Properties Inc.,CBL1.68% which owns 93 U.S. malls, had redevelopment projects in various phases at 20 of its properties this year. Westfield Group, owner of 47 U.S. malls, intends to ramp up its redevelopment efforts, spending $3 billion over the next three years, compared with the $800 million it spent in the past three years.

Mall owners are being selective about centers to upgrade. The retail-property industry has a long history of throwing good money after bad by trying to save shopping centers facing tough competition and growing vacancy rates.

These days, most redevelopment is taking place at the country's top-performing malls, like Roosevelt Field, which is packed with holiday shoppers scrambling to complete their gift lists. Only 289 of the country's 1,070 malls are considered to be in this category because they generate median annual sales of $535 a square foot, compared with the industry average of $370.

Green Street Advisors, a real-estate research firm, estimates that Roosevelt Field, in Garden City, N.Y., generates average sales of $1,040 a square foot, thanks largely to the demographics of the market it serves. More than 1.8 million people live within 10 miles, and the median annual household income is $116,302 in that area, more than double the average in the U.S. of $50,502, according to Simon.

Returns also have proven to be more attractive for landlords that have invested in strong properties rather than weak ones.

Simon, for example, is redeveloping 25% of its top malls in terms of sales per square foot, 10% of its mid-class malls and none of its lowest-performing malls, according to Green Street. "That's where you get the biggest bang for your buck—when you take good and make it great," said Cedrik Lachance, a Green Street analyst.

For Simon, owner of 159 U.S. malls, the redevelopment push has the company planning to spend more than $1 billion in each of the next three years revamping its best properties.

"The more compelling we make our properties, the better they will be able to compete with all other forms of retail distribution," Mr. Sokolov said.

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